An accredited investor is defined as an individual, bank, trust, or other entity with a certain level of financial sophistication such that they can safely invest in securities not registered with the SEC. Such an investor has a particular level of financial savviness and knowledge that they don’t need to rely on the protections offered through regulatory disclosure filings involved in registered offerings. These individuals or entities can achieve accredited investor status by satisfying particular criteria such as net worth, income, governance status, size of assets, or relation to the one issuing the securities.
Do You Qualify?
A relatively small percentage of households in the United States would qualify under the criteria designated for accredited investors. For certain offerings, there is no official accredited investor certification process in order to qualify. You simply need to demonstrate that you meet the net worth and/or income criteria in order to participate in offerings that are federally exempted. For other offerings, in particular, those which have been generally solicited and advertised, you may need to prove that you are an accredited investor.
The specific criteria for individuals as given by the Securities Act of 1933, Regulation D, Rule 501 is as follows:
* Earning an individual income in the past two years of more than $200,000 and expecting to earn that same income in the current year
* Earning a joint income with a spouse in the past two year of more than $300,000 and expecting to earn that same income in the current year
* Having a net worth exceeding $1 million (not including the value of your current primary residence)
One of the above criteria must be met in order to be considered as having received accredited investor status.
The qualification process based on income is not complicated. However, the net worth calculation is a little more involved. Determining your net worth is achieved by subtracting the value of your liabilities from the value of your assets. Debts of course can include car loans, mortgages, credit card balances and student loans, etc. Assets can consist of retirement savings, cash, cars, the value of your home, investments, and real estate. Since a typical investor has a multitude of different assets, verifying your net worth could involve several forms of documentation.
Qualifications for Entities
Entities such as a corporation, bank, nonprofit, partnership, or trust can also achieve accredited investor status. Any entity can be considered an accredited investor if it has equity owners who are also accredited investors. An entity with assets greater than $5 million may be considered an accredited investor under certain circumstances as well. Likewise, registered broker dealers and investment advisers can also qualify for accredited investor status.
